Contents

Introduction

Contents

Shipping

Ports/Marine Services

Cruise/Leisure

LP Investors

Maritime Transport includes 3 segments: Shipping, Ports/Marine Services, Cruise Ships. Consolidation has reduced competition in the Shipping industry, while pressures for improved emissions and waste performance are on the rise. In the Ports/Marine Services sector, the trend of bigger ships drives demand for bigger ports. Cruise Ships is the fastest growing segment of Tourism.

As the EU’s initiative, JPI Oceans, says “The Grand Challenges of the oceans cannot be solved by a single country.” Indeed, all countries and industries are ocean stakeholders - and the financial community is among them. Here is our guide for investors who want to make a difference.

I. Shipping

Industry

Maritime shipping is a vital industry, carrying 90% of global trade. Supply chain issues are the concern of every responsible investor, and shipping is involved in almost every trade. The global economy has been in relatively good health, yet the shipping industry is in transition. Excess vessel supply is forcing consolidation. Heavily leveraged operations are particularly vulnerable. The credit ratings of the largest companies are stronger than the rest.

The largest companies are diversified beyond shipping, with subsidiaries for oil and gas exploration, terminal activities, drilling services, supply servicing and oil tanker shipping. As a result, many shipping companies service the extractive industries which are highly damaging to ocean ecosystems.​

Environment

The trend toward globalisation and economies-of-scale drive the industry forward, while that of “green shipping” attempts to limit environmental damage. Engaging with the leading companies and their lenders can be an effective tool for change in this key industry. ​Pollution from the industry has decreased over the past 15 years. But it does carry a large environmental footprint, with carbon emissions (3% of global CO2), oil spills, chemicals and other waste. This brings it into conflict with other industries that require clean oceans, like fishing and tourism. (See our blog: What COP21 Means for Maritime Transport).

The International Maritime Organization (IMO) is the UN agency responsible for the safety of global shipping, as well as for clean oceans. Since July 2015, the EU requires all ships exceeding 5,000gt to submit independently verified carbon emissions on all voyages. National regulations set and enforce local standards. ​​Several innovations promise to reduce the shipping footprint - engine and propeller improvements, ballast water treatments, high-tech coatings and skysails. But the biggest trend is toward larger and more specialised ships. This feeds industry consolidation and also creates over-capacity during economic contractions.

Investment Outlook

Top 50 Public Shipping

A recent Moody’s reportsays shipping companies should show annualised EBITDA growth of around 5-7% over the next 12 to 18 months. Operating efficiencies and lower fuel costs will be key drivers. Of the four main shipping segments — dry bulk, crude oil tankers, product tankers and containers — tankers look best and dry bulk looks weakest.

However, Fitch Ratings has downgraded its Global Shipping 2016 Outlook from stable to negative. The agency expects that slower growth in emerging markets and global trade will exacerbate shipping overcapacity, especially in the dry-bulk and container segments.

We monitor the top 50 public shipping companies. This is an oligopoly, where Revenues range from $42bn - 0.5bn and Market Cap. from $27bn-25mm. Trucost Impact Ratios show the exposure of company revenues to environmental damage costs, whilst Enviro Damage/EBITDA shows exposure to profits.

Volatility in the shipping sector has made it typically a choice for traders rather than long-term investors. The winners of the consolidation game, also gaining from lower fuel costs, will have the resources to play the favored segments in the coming year.

Top 50 Public Shipping Companies

45 Private Shipping Companies

Engagement

We monitor the privately-held shipping companies with revenues >$1bn, of which there are 45. This is a larger segment than the public shipping companies.

Debt and project finance are used more than common stock to finance expansion, so most prefer to stay private. This is similar to the seafood industry and makes investor engagement more difficult.

Engaging with the banks who finance ships is important, especially post COP21 when cleaner fuels and pollution controls are available. Direct engagement with private companies is effective when coordinated with their customers and policy-makers.

II. Ports & Marine Services

Infrastructure

A surge in container port infrastructure investment is expected to keep pace with forecasted growth of 4.5% per annum through to 2019 (source: Global Container Terminal Operators Annual Report, 2015). Asia remains the primary source of growth, accounting for 60% of global demand. (source: Drewry Maritime Research). In addition to global port infrastructure upgrades, a major project is the Panama Canal Extension Program, which will open in 2016.

Ports need investment to keep pace with the global trade environment. Major hubs such as Port of Rotterdam are already expanding with Maasvalkte 2 and Felixstowe. Projects often include channel deepening, which can disrupt ecosystems. Expansion can be achieved by reclaimed land, which is widely seen as a ‘greener’ approach. Ports without this option have to explore other strategies such as environmental offsetting.

"Green Ports"

​The world’s key ports have committed themselves to reduce greenhouse gas emissions (GHG) with the World Ports Climate Initiative (WPCI). They do this through influencing the sustainability of supply chains, taking into account local circumstances and varying port management structures. They also cooperate with ships in support of measures to reduce emissions to air from ships, with the Environmental Ship Index (ESI) identifies seagoing ships that perform better in reducing air emissions than required by the current emission standards of the International Maritime Organization.

We monitor 23 public ports & marine service companies with revenues >$500mm. China dominates, followed by Hong Kong, as a reflection of Greater China's large ports and trading activity. Trucost Impact Ratios are more favorable with Ports than for Shipping companies, with most ratios <5, largely due to lower direct CO2 emissions by Ports. The investment outlook for Ports and Marine Services, of course, closely tracks that for Shipping.

The highlights below show that 2015 was a mixed year for stock returns in the sector. Trucost data shows exposure to revenues (Impact Ratio) and profits (EBITDA) from environmental damage. The statistics show better environmental performance than the shipping industry, as ports are burning less fuel. The number of public companies is on the left axis.

42 Top Public Ports Companies

67 Private Ports Companies

III. Cruise Ships & Tourism

The Cruise Ship sector is the fastest growing segment in Tourism. The $117bn industry has benefitted from rising affluence in Asia. High customer satisfaction (Ocean Cruises were ranked Best Overall Vacation) has led to steady growth of 10%pa, with 23 million cruisers in 2015.

The cruise line outlook is for more growth while meeting pressure to improve 3 environmental challenges:

Waste management

CO2 emissions

Wastewater treatment

The charts below show the even split of public vs private companies in the cruise sector, and the dominance of 6 companies (out of 34 total) with revenues >$6bn. The directory shows the top 14 cruise ship public companies with revenues >$150mm, along with Trucost data and OAI Stewardships scores.

Islands are much like cruise ships. They need to be self-sufficient and resilient. Cruise ships use technology to solve some of the issues faced by island nations. The two are also linked economically, as they depend on each other for a substantial part of their livelihood in many cases. Island nations are victims of climate change, since their own emissions are small yet they are faced with rising sea levels and storms.

Leisure activities like boating, diving and fishing are important for millions of people worldwide. Yachts and racing attract sponsors that have an interest in ocean conservation. Seaside resorts are a segment of the hotel industry that has high customer loyalty - yet the resorts face new challenges from climate change and pollution that require active participation in policy forums.

Private Cruise Ship Co's

Public Cruise Ship Co's

IV. Waste Mgt & Recycling

Waste management and recycling is one of the biggest needs in the Blue Economy. From servicing of ships and ports to recycling ocean plastics, investment opportunities are abundant. In addition to general waste management companies, a variety of marine specialists are actively providing solutions. We include this sector under Maritime Transport because many of the applications are driven by shipping and ports, but it's importance extends to all sectors and all countries.

MARPOL73/78 is the International Convention for the Prevention of Pollution from Ships. The international rules for the management of ship-generated waste are set out in MARPOL Annex V.

The charts below show the leadership of France and the US with specialty firms in marine waste management. For public companies in the broad waste management sector, the US leads with China, Japan and France following. ​

Marine Waste Specialists

General Waste Mgt - Public

V. LP Investors in Maritime Transport

We monitor 900 Limited Partner (LP) investors in private equity funds that include maritime transport companies. Most investors have a minimum investment size of $1mm. Maritime Transport investments are typically part of a broader interest in transportation or industrials. We do not publish the names of LPs but we are available for private consultations. The largest investor type is "Institutional - General".